Getting yourself out there and starting your own company is a huge step, yet more and more entrepreneurs are out there doing it, leaping into the unknown. We have all heard the scary statistics in which 90% of them fail, making it seem almost inevitable. So it is just as well to get used to the thought, to be as prepared as possible and to learn to face up to it. Having seen many projects, from super early birds to veterans, we’re here to give you the scoop on the most frequent reasons why startups fail and potential ways to avoid them. Learn about market needs, business models and financial planning in the first part of our two-part guide.
Nowadays, ambitious entrepreneurs get into the startup game for a variety of reasons, among which we can definitely highlight one: they have all heard some significant success stories about a few rising and glorious startups, and they would like to to follow in their footsteps. All the founders of these startups simply caught hold of ideas at the beginning that were clever and lucky enough to survive. The world is full of entrepreneurs with smashing, creative and innovative ideas, people wishing not only to control their own career, but by setting up a new company, these founders also want to make a difference.
However, a great idea and a promising start do not mean that everything is on track and that the entrepreneurs can lay back and enjoy a prosperous business future. Approximately 100 million startups are launched every year, but the sad truth is that 90% of these businesses are bound to end in failure, leaving only 10% with a chance of success.
Although this statistic would make any business starter apprehensive and afraid to give their ideas their best shot, we are here to assure you that there is a potential way out of every business failure, and there is always a future after that. In Europe, being ashamed of failure has a long historical tradition, starting from the traditional approach of the education systems, and a mindset that is still very much present, even in the younger generations. At our workshops we can always clearly differentiate between a startup audience from Europe and one from the US. While people from the US are happily putting out for discussion what mistakes they have made and how many times they have made them, the European crowd is usually silent and a slight frustration can even be sensed in the air. Any attempt to organize a ‘blooper event’ in Europe for public brainstorming on others’ mistakes will end in failure in most cases.
We didn’t learn how to walk or talk in a day when we were kids, so we are not going to learn how to become a successful entrepreneur in a day as adults either. Therefore, failure should not be perceived as something negative.
Instead, let’s look at how to turn that anxiety into a powerful force that can actually help your business become a part of that successful 10% by reviewing the most common problems that a startup can face and the best solutions for those situations.
1. No market need
Issue: The first and most frequent reason why a new startup might easily disappear is actually something that we think should go without saying, but still, many founders fall for the trap that could easily be avoided. The downfall of 42% of startups is caused by the decision to build a product that nobody wants or needs, and by creating something without actually testing the concept in reality. Of course, it is evident that a startup will fail if it does not solve a market problem because their product is not compelling enough to encourage people to actually purchase it. We know Steve Jobs did it with the iPhone, but creating a market need later on for the product or service that no one knows, understands or has ever previously used is highly challenging and very rarely successful. In a nutshell: if there is no need for your product or services on the market, you won’t be able to find customers, so you cannot make money.
Another important aspect of this problem that we have to mention is that companies often fail due to bad market timing, for example, when they are a few years ahead of their market. If you enter a market too early, you may be stuck, waiting for a day that never comes, regardless of how amazing and strong your team is. Sometimes, tech entrepreneurs have an idea so advanced that the technology is just not there yet. This happened in the case of AskJeeves – which could have been Google, had the technology been as good as in the days of Google. Ask Jeeves was technically a search engine, it included lots of techniques and ideas that later became part of Google, such as semantic search or ranking web pages by hyperlinks. The only problem was that the world just hadn’t got there yet. However, if you enter too late, we probably don’t need to explain how you’ll be fighting a hopeless battle against companies with greater scale. It’s all about timing!
Solution: The best way for a company to sidestep these market problems is to take preventative action at the outset. The company has to study the significance of the problem that the company is committing itself to solving. The validation process should be based on real experience and it is beneficial to analyse not only the local market but the regional and international ones as well. It is important to have detailed knowledge of the market, the problem, and the target audience early on, in order to determine whether the idea is actually feasible, and people will actually need the product or not.
Even more important is that you should not let your market deceive you. Don’t forget: people are usually nice. They will sense the answer you hope to hear to your questions and tell you that, just to make you feel good. Especially if the questions are unconsciously manipulative. Let’s say you are creating a gamification tool for people to use while they are waiting for the bus. You might ask:
You: Do you also find it annoying to have to wait for the bus every morning?
Customer: Yes, of course, I find it super annoying.
There you go, there is a customer for you. Or is there? If you asked instead: “How do you feel while waiting for the bus”, or “how do you spend the time while waiting for the bus”, you would have learned much more. If they told you that it’s fine by them because they use that time to catch up with the news, it would immediately seem to be much harder to sell your tool to that customer because you have to compete with ‘the news’ for the customer’s attention.
Entrepreneurs should definitely test their ideas very thoroughly, and the good news is that there are various ways to make that happen in a cost-efficient way, starting from creating a simple web page to putting your retail products into existing stores on consignment. Each project might require different angles and methods for validation, and it is up to your creativity to find your way to your potential customers.
2. Business Model
Issue: A lot of unsuccessful entrepreneurs have learned the hard way how essential a professional business model is. A well-determined and well-functioning business model should be the backbone of a business, which means that if a company does not pay enough attention to it, or simply takes it in the wrong direction, it can result in irretrievable consequences. Also common mistakes can be made by a startup if their plan sets bad goals or poor benchmarks or they don’t exactly fit the project itself. Even an overcomplicated business model can create confusion, and beginner entrepreneurs often make that mistake. Many seem to think once they’ve got their brilliant idea, their road to success is paved. The truth is, however, with a weak business model you’re actually paving the path to failure. Vitoto founder, Vinay Patankar, had the great idea of allowing people to create and share videos collaboratively, but he himself wrote that bad business was mainly what led them to failure.
It is also important to note that an innovative and disruptive approach sometimes concerns the business model itself. The most obvious example for that is in the success stories of the low-cost airlines. Providing traditional airline services by means of an innovative business model that allowed them to cut costs radically shook the whole airline industry in Europe to the core.
Solution: As with validation, there are no ultimate solutions or 100% guaranteed business models that you can just adopt that will lead you straight to success. First and foremost, entrepreneurs have to focus on finding a scalable way of acquiring customers and monetizing them at a significantly higher level than their cost of acquisition. To be able to choose the right business model, first, you need to understand your business and be able to answer a few questions. You need to make sure that there are enough potential customers, that there is a real target market in existence. You need to be familiar with your competition, to see what would make your business stand out, and, just as importantly, you need to actually know what value you bring to the market. One useful tool you can use in this process is the Business Model Canvas, first developed in the book Business Model Generation, by Alexander Osterwalder and Yves Pigneur.
Successful companies prove that a simple rule could change the business model entirely, and it helps to keep the business on track.
Secondly, you must create a clear and concise business plan to “turn the theory into practice” by creating the actual framework of operations for your company. Ideally, the business plan will be drafted with professional help to build it on solid ground. You should strive to obtain feedback from potential investors as well, and later improve and review this plan on a regular basis. Of course business plans are essentially theoretical, and will involve making qualified assumptions. At this early stage, you will need to review your assumptions and the conclusions you have drawn more often. The investors’ approach to any kind of agile planning is, however, a different question, but in our experience, European startup investors increasingly understand both its importance and the mechanism of startup operations.
3. Run out of cash
Issue: One of the key challenges that any startup can come face to face within the real business world is related to finance. Although the source of the problem is that business owners who, despite struggling with fundraising, go on a spending spree until they realise that their money has gone. The typical mistakes that we encounter pretty often include: renting a fancy office, over-hiring, or the engagement of highly impressive advisors of the kind that are meant to provide services for multinational companies, not startups. Management has an important role in this area too, and what frequently goes wrong is that the management fails to achieve the next milestone before the cash runs out. Needless to say, as income increases, the expenditure also increases and, to top it all, startups rely heavily on investors who provide them with strong financial support. Inexperienced CEOs usually underestimate the time needed to secure additional rounds of investment. This leads them to endanger the existence of the company and some venture capitalists (VCs) are not ashamed to use that leverage when it comes to that. A startup may even need to shut down because, in the end, they fail to secure the last-minute funding they need, as in the case of Zirtual , a company that provided on-demand virtual assistants, but had to lay off all of its employees overnight in August 2015.
However, here we need to point out another typical mistake, that of considering VCs to be the only source of money for a startup. This is a huge misconception, and for that reason we are going to address it in a different blog post. Still, we have to mention that it is crucial to realize that VC money is only suitable for a very limited number of companies, while others will aspire to involve other financial resources. It is also important to understand that the valuation of a startup does not change in a linear fashion over time: time passing does not equate to a company being worth more, so constantly seeking VC money can in some cases actually undermine a whole company.
Solution: Finance should be handled as prudently as possible; and with a professional, experienced and talented CEO, financial problems can be managed more easily. Their main task on this front is, on one hand, to estimate how much cash is left in the company and whether it can carry the company to the next milestone, which can lead to cash flow positive; and on the other hand to provide continuous financing for the operation. One of the CEO’s most important tasks is knowing how to regulate the accelerator pedal; in critical financial periods, the pedal needs to be set very lightly to conserve cash. Furthermore, CEO-s must be continuously focused on fundraising: if your business relies on external investments, there is no time for you to sit back and enjoy the view. As soon as you have secured an investment and celebrated it with some bubbly, you have to be up and ready to continue the funding journey and begin to secure the next round. We have seen countless companies starting their fundraising 3-4 months before they were actually out of money. You would be better off devoting 18-24 months to the task if you do not want to have months and months of sleepless nights with the risk of losing everything.
Are you interested in more more mistakes and their solutions, or do you want to know more about coping with failure and turning it into a meaningful learning experience? Tune in next week for Part 2 of this article, or if you’re super curious, use the “Contact us” section, and let’s grab a virtual cup of coffee!